Bypassing Congress on Federal Debt: Executive Branch Options to Avoid Default

In a prior article, I examined how a U.S. debt default might occur and analyzed its potential consequences. Even a mere “technical” default, such as temporarily missing an interest or principal payment, “almost certainly [[would] have large systemic effects with long-term adverse consequences for Treasury finances and the U.S. economy.” The most plausible U.S. debt default would in fact be a technical default–a temporary default due to Congress’s failure to raise the federal debt ceiling. The U.S. Department of the Treasury recently cautioned that such a default, which became a near-reality in October 2013, could be disastrous: “In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth.”

This Feature focuses on that potential cause of a U.S. debt default–a technical default resulting from Congress’s failure to raise the federal debt ceiling–and analyzes how the executive branch of the federal government might be able to prevent such a default regardless of the Congress’s inclinations. My analysis assumes that Congress fails to raise the debt ceiling due to political paralysis, political gamesmanship, procedural voting impediments, or any reason other than a clear desire to force the nation to default on its debt; that more U.S. debt is coming due than can be refinanced under the applicable debt limit; and that the executive branch is searching for ways to avoid a debt default.

To that end, the Introduction provides historical context, explaining the debt ceiling as a means of delegating certain congressional borrowing authority to the executive and discussing the ongoing potential for debt-ceiling showdowns. Part I examines the publicly discussed options for avoiding a U.S. debt default, including the argument that the President has implicit borrowing authority under the Fourteenth Amendment and that the executive branch could prioritize its payment obligations. Part II also explains why these options are not generally considered viable.

Part II of the Feature proposes alternative options for avoiding default, applying structured finance modeling to federal debt. In the first of these options, a special-purpose entity (SPE) would issue debt that is not full faith and credit to the U.S. government per se and would use the proceeds to make a back-to-back loan to an executive-branch agency or entity on a nonrecourse but secured basis. In the second of these options, the special-purpose entity would use the proceeds to purchase income-generating financial assets, such as rights to the future payment of specified tax revenues. Part III also provides a detailed legal analysis of these alternative options.

Finally, Part III explains how credit rating agencies and investors would likely view these alternative options. Part III also discusses how these options should be constrained to prevent their potential abuse.